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Unformatted text preview: n—§ 318 (a)(5)(C)
(Cont’d)
Example: A B 50% 50%
X 100%
Y 17 Prohibited Attribution—§ 318 (a)(5)(C)
(Cont’d)
X owns in Y—100% (§ 318(a)(3))
A owns in Y—0% (§ 318(a)(3) from B to X and
owns
§ 318(a)(2) from X to A and this is prohibited)
318(a)(2) 18 § 302 Tests
§ 302 (b)(1)—not essentially equivalent to a dividend
Some reduction in stock ownership
Not in control of the corporation after the transaction 19 § 302 Tests (Cont’d)
§ 302 (b)(2)—substantially disproportionate
302
redemption
redemption
50% test—immediately after the redemption, the
50%
shareholder owns less than 50% of the voting stock,
shareholder
AND
80% test—immediately after the redemption, the
80%
shareholder owns a percentage of stock which is less
than 80% of his percentage of stock immediately before
the redemption (based on both voting power and value)
both 20 § 302 Tests (Cont’d) A B
40 60
X Example 1: X Corporation redeems 10 shares from A
Example 2: X Corporation redeems 25 shares from A
Example 3: X Corporation redeems 10 shares from B 21 § 302 Tests (Cont’d)
Example 1
A owns in X before 60/100 = 60%
A owns in X after 50/90 = 56%
Therefore, A fails the § 302(b)(2) 50% test
Example 2
A owns in X before 60/100 = 60%
A owns in X after 35/75 = 46%. Therefore, A passes the § 302(b)(2) 50%
owns
test
test
46%/60% = 76%. Therefore, A passes the § 302(b)(2) 80% test
Example 3
B owns in X before 40/100 = 40%
B owns in X after 30/90 = 33%. Therefore, B passes the § 302(b)(2) 50%
owns
test
test
33%/40% = 83%. Therefore, B fails the § 302(b)(2) 80% test
However B would pass the § 302(b)(1) test
Some reduction 40% to 33%
No control after the redemption. A controls X 22 § 302 Tests (Cont’d)
§ 302 (b)(3)—termination of shareholders interest
Waiver of family attribution rule requirements
1. No interest retained in the corporation other than an
1.
interest as a creditor
interest
2. No acquisition of prohibited interest within 10 years of
2.
redemption
redemption
3. Agree to notify IRS of acquisition of prohibited interest
3.
within the 10year period
within 23 § 302 Tests (Cont’d)
§ 302 (b)(4)—partial liquidation for noncorporate
302
shareholders
shareholders
“§355” test
“Not essentially equivalent to a dividend” test
Not 24 End of Chapter 4 Slides Any Questions on EndofChapter
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 Fall '08
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